Euro exit bad for Fritz

With the euro crisis rapidly approaching its climax, most attention in this country has inevitably been focused on what will happen to Ireland if the single currency breaks up. However, the consequences for Germany could be far more disruptive.

With the euro crisis rapidly approaching its climax, most attention in this country has inevitably been focused on what will happen to Ireland if the single currency breaks up. However, the consequences for Germany could be far more disruptive.

Even after the recent weakening of the euro, it was still trading at almost 86p against sterling on Friday. Converted into "old" money, it is the equivalent of IR£1=Stg£1.09. When one considers that the punt traded at 70p-80p for most of its 20-year history, that implies a devaluation of between 27 per cent and 36 per cent against the euro.

The devaluation against any new German currency could be very much greater.

To see what could happen if the eurozone broke up and Germany unveiled a D-mark Mark II, one has only to look at the Swiss franc, whose value rose by 60 per cent against the dollar and by 40 per cent against the euro before the Swiss central bank was forced to intervene and cap its value last August. A break-up of the eurozone would see the DM Mark II similarly soar in value. Throw in the likely recriminations that would follow any break-up and the impact on German exports could be devastating.

The blunt truth is that Germany is going to foot most of the bill for the euro crisis. The only question is how it will end up paying.